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Bill Prew: We are going to start by looking at developments in the fund governance arena. Governance has changed a lot over the last five years. Caroline, could you explain where you see the industry now and how things have evolved over the last few years?

Caroline Hoare: I'd say it's a tale of two parts. Undoubtedly many funds now take the issue of governance very seriously. We often find that when people are forming their boards the consultation process might involve up to 20 different people. But I do still get calls from people saying they've been offered a “buy-one, get-one-free” offer; those conversations tend to be extremely short!

BP: Most people recognise that progress has been made and there are boards that are particularly well run. Why do you think there are still boards that aren't run particularly well?

CH: When you are creating a board you need directors who are genuinely independent – independent of each other – and who have complementary skills. We find the people on our panels who are former COOs are particularly popular, especially with start-ups, for obvious reasons. You want complementary skills and genuine independence. If possible, avoid having people from the same ‘director house’ because they probably work together and might well give very similar views. A strong board and directors can really help in a crisis – I can tell you that from personal experience, having run a fund for 10 years. There were moments when I used to say, I don’t know what I’m paying these people for on 364 days of the year, but on the 365th, I really do know! And on that day I expected a great deal from them. And I was very grateful for their input because they were good directors.

BP: I was at an event recently and there was a big focus on whether or not investors should be more involved in the director selection process – after all the investors are the primary stakeholders in the fund. Is that something that you buy into?

CH: On the whole I think it's probably not a good idea to have too much investor input into the choice of directors because that inevitably leads to a conflict of interest later on. If you've got a first seed investor who's put its own nominee on, is that nominee director going to take as much care of the subsequent investors? Besides, as a matter of practicality, you've often chosen your directors before the investors come in, so it may not be a practical solution.

On the other hand, where investors could really help is more time doing due diligence on the directors themselves. They should talk to them when they're doing their due diligence, if possible meet them.

That may not be practical if they are miles apart, but at least talk to them. Something I feel very strongly about is they should ask funds the very significant question: “What do you pay your directors?” The answer to that question gives you two very important pieces of information.

The first is, are you paying your director enough that he/she is going to give the fund the commitment that the fund deserves? Secondly, it tells you how seriously the fund takes corporate governance. If the manager thinks that he can get a good director for $5,000 a year, it suggests that corporate governance is low down on his list of priorities.

John McCann: There are various compliance and governance edicts which provide quite a prescriptive framework of what the board needs to deal with (in particular in highlighted onshore domiciles). In recent years, during and since the financial crisis, you've seen real skill sets performed by independent directors. The composition of the board in our experience is gradually improving over the past few years since the crisis; this has been driven by a combination of commercial and regulatory demands, in particular in highly regulated domiciles. It's definitely improving at a faster pace generally, I think, onshore than it is offshore.

There are still instances where you need to provide a lot of support and, on occasions, education, but that's generally changing for the better, and I think all of the vendors have an interest in ensuring that the board does not consist of sycophants with a one-dimensional collective skill set. Having a variety of complementary and diverse skill sets is so important. Historically we have seen a lot of ex-CEOs, ex-fund administrators, ex-lawyers.

What, however, has been really lacking historically, but is improving recently, is individuals that possess risk management on the investment management side. The Cayman Islands has issued a statement of guidance on corporate governance which says there should be a minimum of two board meetings per annum. It also addresses what is expected in terms of custodial depository reports, admin reports, marketing reports, manager reports. Things are getting more and more prescriptive across all the major fund domiciles, not just the highly regulated ones.

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